Deloitte, Touche & Monitor?

by Victor Cheng

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After recently posting an article on Monitor’s bankruptcy and acquisition by Deloitte, I received a number of follow up questions.

By far, the most common question I’ve been asked is:
How does the consulting industry change with Deloitte’s acquisition of Monitor, and what does it mean for career opportunities at Deloitte+Monitor?

As I mentioned in my previous article, great strategy with poor execution gets you nowhere.

So the key questions are:

1) What would/should Deloitte do with Monitor?

2) What will Deloite actually be able to pull off from an execution stand point?

Any answer I give is merely speculation, but hey, I’m a consultant so I’m more than willing to speculate!

(Hint: If a client ever asks you for an opinion where you have very little hard data, it’s okay to say what you think, so long as you explain it is merely speculation, an opinion you can’t support with the facts, or a hypothesis.)

To start, let me step back for a second and explain why acquisitions are done in the first place.

Most acquisitions fall into one of two categories (I’m leaving out private equity deals for the time being):

1) A Financial Deal

In a financial deal, the acquirer just wants to buy more revenue and profit. This is usually done as a consolidation play where a $1 billion company is more highly valued by the stock market than two $500 million companies, or when a firm simply wants to grow sales faster.

Basically, the acquisition is motivated by a desire to merge financial statements, combine revenues, and reduce overlapping costs, making the new company bigger and more profitable (at least in theory).

2) A Strategic Deal

In a strategic deal, the acquirer sees an opportunity for the acquisition to not just be “additive” in nature (such as in a financial deal) but sees the deal as having some kind of “multiplier effect”.

The classic example is: a small biotechnology firm has just gotten the patent to cure all cancers. The new drug has the potential to generate $100 billion a year in sales. But the young company has no sales force, no doctors as customers, no manufacturing facilities, and no revenues (and “negative” profits).

A big pharmaceutical company has a huge sales force, every doctor in the world as a customer, manufacturing facilities around the world, $50 billion in revenue and a lot of cash in the bank.

If a deal were merely additive, the combined company would have $0 billion + $50 billion in revenue… which is well, still a $50 billion company.

But in this case, a deal would have a multiplier effect. The big company could buy the little company, immediately manufacture the new drug in huge quantities and sell it through its enormous sales force.  The new company would have $150 billion in revenue (a multiple of the target company’s revenue as a stand alone company).

To oversimplify, in a financial deal, the acquirer values the financial production of the target company to see if the deal makes sense.

In a strategic deal, the acquirer values the financial production of the target company after the acquirer absorbs and operates the business to see if the deal makes sense. In the extreme case, it doesn’t really matter what kind of revenues the target company was producing pre-acquisition… as the main value is the multiplied value that’s realized after the deal.

This is one reason why companies with no revenues can sometimes be acquired for billions of dollars (Instagram and YouTube come to mind as examples).

Sometimes the multiplier effect doesn’t come immediately and instead comes in the form of a future revenue growth rate that’s structurally higher post acquisition than pre acquisition.

In Deloitte’s case, I think it’s a hybrid deal that has both an additive and multiplicative component.

While there will be some initial revenue disruption from the acquisition, the reality is Monitor has (with a few exceptions) very strong people around the world. Most of their active engagements are ones where the client will not want to cancel and start over with another firm.

In these cases, it makes too much sense for everyone (clients, Monitor consultants) to continue projects that are already in progress and to re-assess relationships after the project has been completed.

Instead of paying Monitor fees, the client now pays Deloitte. So that’s the additive component.

The multiplicative component comes from the fact that Deloitte already has a global client list in Audit, Tax, Information Technology, etc…

Deloitte has these clients in countries and regions where Deloitte’s strategy group has little or no presence. These are clients that could be cross sold strategic services, but there is nobody there to do the cross selling or the delivery.

In one fell swoop, Deloitte’s strategy group will now have a geographic coverage that’s substantially bigger — literally overnight. The caliber of the consultants they will inherit from Monitor is exceptionally high (some would argue possibly even higher than the current consulting staff).

The hard part about scaling the growth of a professional services firm, such as a consulting firm, is it’s exceptionally difficult to expand consulting staff fast through organic growth — without sacrificing the quality of the consulting staff.

Some things like Partners, Project Managers and Senior Associates just take a certain amount of time to “grow”.

It takes 9 months for a woman to bring a baby to term. If you want a baby faster, you can’t put 9 women in a room and produce a baby in 1 month. It just doesn’t work like that. Some things just have a natural timeline.

This is the case with consulting firm partners and the like. There is a culture and methodology to adopt that varies across firms. This why amongst the top firms, you see very little mobility from one firm to another.

For example, it’s unusual for a McKinsey person to make a lateral move to BCG and vice versa (with the exception of using an MBA program as a natural transition point).

With the Monitor acquisition, Deloitte picks up a major geographic footprint, doesn’t sacrifice the talent level in the process, has first shot at picking up Monitor’s clients, and has a local footprint to sell strategy work to Deloitte clients from other practice areas.

In short, the deal has the potential to be a good deal for Deloitte.

I say “potential” because a lot has to do with how well Deloitte executes the post acquisition integration and whether or not the cultures will mesh (which is frankly one of the big issues in a post merger type situation involving a large deal).

So what are the downsides of this deal for Deloitte?

The initial risk is that of overpaying for Monitor. I’m almost certain that Deloitte insisted on Monitor declaring bankruptcy before closing the deal. Here’s why.

Monitor’s net worth = the value of its assets – value of its debts

For those who know finance, the above formula is essentially the “balance sheet” formula… or the formula used to disaggregate a company’s capital structure (not something normally covered in strategy case interviews, so if this is new to you, don’t worry about it).

In Monitor’s case, they had a lot of outstanding debts (about $200 million worth).

If Deloitte were to buy Monitor in a traditional acquisition (without requiring a bankruptcy first), then Deloitte would get all of Monitor’s assets (offices, intellectual R&D, etc…) and be required to assume all of its debts.

A more attractive deal for Deloitte would be one where they get all of Monitor’s assets without having to inherit all of Monitor’s unpaid bills (approximately $200 million worth).

In short, Deloitte likely insisted on the bankruptcy prior to acquisition to reduce the effective cost Deloitte would need to pay for the acquisition (by potentially several hundred million dollars).

Since the bankruptcy court recently approved Deloitte’s acquisition, a few things should or could happen now:

First, if Deloitte is smart, they should immediately send a message to all Monitor employees saying more or less:

1) You still have a job! (So don’t quit!)

2) Welcome to the Deloitte family, we are super excited to have you join us.

3) This is a difficult time that seems highly uncertain, but what is certain is we acquired Monitor because we really value you — the consultants, managers and partners of Monitor.

4) Did we mention you still have a job? (And oh yeah, don’t quit…)

They won’t use those exact words, but that’s more or less the message that the Monitor folks need to hear.

(Here’s a tip for managing people through a crisis — in the absence of information, people will assume (and act upon) the worst possible scenario. Also important to remember is that whatever you tell them, they will forget or assume it is no longer valid every 48 – 72 hours.).

In this case, the worst case scenario for a Monitor consultant is everyone is getting laid off and losing their jobs (or a lot of people are getting laid off and losing their jobs).

If I were a Monitor consultant going through all of this, I’d be revising my resume, updating my LinkedIn profile, and reaching out to old contacts.

Since Deloitte paid a substantial amount of money for Monitor, priority #1 is to get everyone to not quit.

Consulting is very much a people business. One of the quirks of a people business is that your #1 asset, your people, walk out the door every night — and whether they come back or not is a choice they make. It’s not a guarantee.

Assuming Deloitte has done this (and if you work for Monitor or know people who work for Monitor, post a comment below and let me know how Deloitte is handling the transition), the next step is to stabilize the client base.

Upon the news, I’m certain clients immediately started thinking about the partners they know at other consulting firms — possibly to back fill for the potentially disappearing Monitor team.

And if the partners at McKinsey, BCG and Bain were smart, the day after Monitor’s bankruptcy announcement they should have reached out to Monitors’ clients to “catch up over lunch”.

As quickly as possible, Deloitte needs to assure the former Monitor Partners that they are now partners in good standing at Deloitte. They also need those same Partners to reach out to clients to assure them that while Monitor went through a major ownership change, the day-to-day has not changed one bit.

(And the leaders responsible for the poor decisions that led to Monitor’s mess are no longer with the firm… a.k.a., the internal problem has been solved.)

The same consultants that have been working on the client’s project this whole time will continue to work on the project. The partner leading the project will continue to lead the project. In short, from the client’s point of view, nothing has changed.

It would help to have Deloitte partners participate in these reassurance meetings to confirm that the old Monitor partner is still in good standing at Deloitte. A smart client is going to wonder if maybe the ex-Monitor partner is a “dead man walking” about to get fired, but hasn’t yet been fired.

Keep in mind, it makes absolutely no sense for Deloitte to get rid of Monitor’s partners — since those partners are the asset Deloitte just spent millions acquiring.

But once again, clients under times of uncertainty and lack of information will assume the worst unless told otherwise.

Deloitte and Monitor partners will be racking up a lot of frequent flyer miles these next few weeks on their re-assurance tour. I’ve done one of these tours before (not for an acquisition) and sometimes you just need to show up in person to tell clients they’re important and that you’re accessible to them.

Once the clients are stabilized, Deloitte will probably drop the Monitor back office functions (tech support, email hosting, payroll processing, employee benefits) and get all former Monitor employees using Deloitte’s back office services (saving some operating costs).

Once that too is stabilized, it’s possible the combined firm will engage in a “settling in” period to basically not change anything and see what fallout (if any) they see from clients.

If clients defect in mass, then Monitor consultants will likely ensue (unless Deloitte has the budget to carry unproductive staff at a loss through this transition period).

If clients stay put, the consulting staff roles will remain.

Once the client base and consulting staff has stabilized (e.g., the people who intend to quit actually quit, and the total headcount of ex-Monitor consultant holds relatively constant), then the now larger Deloitte strategic services practice will need to forecast:

1) demand for client work

2) supply of consultants.

If demand > supply, then there will be recruiting.

If demand < supply, then there will be layoffs (or natural attrition) and much less recruiting.

At this early stage in the game, it’s very hard to predict how things will play out. So much depends on leadership and strong execution of the post-acquisition process.

In these “high stakes” situations, execution is especially important because every little change can create a cascade or ripple effect.

If one major client defects, and suddenly 30 consultants are idle, this will be a very precarious situation.<

If those 30 consultants are laid off, then the thousands of other consultants know that their jobs are at risk if they are idle for too long between projects.

Monitor consultants are smart. They will know to get ahead of the change by getting their resumes out there, updating LinkedIn, contacting headhunters who called a year or two ago, reaching out to old contacts.

If consultants on the active client projects suddenly quit in the middle of an engagement, clients will start wondering why ex-Monitor consultants that they’ve come to know suddenly stopped showing up at the client’s site.

This causes them to worry — perhaps the current project is at risk.

This leads them to assign future projects to other firms. Just to be safe, clients might opt to make back-up plans for future projects and call up MBB partners for a conversation.

If clients decline to extend engagements beyond the current phase, this causes more consultants to be idle… which in turn causes more consultants to be laid off or to pro-actively quit to preempt being laid off… which in turn causes even more disruption to existing engagements… which increases the odds clients will defect… wash, rinse, repeat.

As you can see, the integration of Monitor could possibly end up in a self-reinforcing negative spiral — much like flushing an acquisition down the toilet.

Or if the post-acquisition integration gets off to a strong start, consultants could decide to stay put.  Projects would continue to be delivered well, and clients would be much more likely to stay put. Sure you might lose a few clients, but if you do things right, the defections are the exception and not the rule.

It would be smart for Deloitte to absorb some of the financial loss from carrying some former Monitor consultants who were idle. If it were me, I would have budgeted for this in advance as part of the fully loaded purchase price.

For those hypothetically idle former Monitor consultants, everybody will be watching them to see if they suddenly don’t appear in the office one day.

They will be the canaries in the coal mine whose demise (or not) would warn others about a potential threat.

If Deloitte leadership reinforces that there is no threat of job loss, and the idle consultants aren’t fired but allocated to developing new clients, then the whole system calms down.

Consultants stay put.

Clients stay put.

This creates a self-reinforcing positive spiral, and Deloitte ends up with a great acquisition.

So which of the two scenarios will occur?

It all depends on the execution.

How does this impact recruiting?

Well, if Deloitte gets the upward spiral and is able to execute on cross selling “Monitor level” consulting to Deloitte’s base of clients in other practice areas, demand will eventually exceed supply, and the new Deloitte will need to hire a lot more consultants.

This will most likely not happen in the most immediate recruiting season. In times of high uncertainty, it’s a smarter move to be more conservative in setting a firm’s hiring targets and to hire fewer people (just in case the upward spiral was only a temporary improvement).

If Deloitte under-hires during its regular on-campus recruiting cycle, it would most likely use lateral hires to make up the difference. That’s because unlike campus hires that only start working after they graduate, lateral hires are typically able to start working within 30 days.

There could be an opportunity for lateral or experienced hires to apply to Deloitte.

Under this scenario, campus hire offers made in December 2013 will have start dates in September 2014. This would potential create a glaring gap in the supply of consultants that could be filled by lateral hires recruited in January 2014.

These timelines could be accelerated if the stabilization process happens more quickly.

I’d say by 2014, the situation at Deloitte will have stabilized one way or another.

Given Deloitte’s strategy practice is now a larger consulting operation and operating in more countries, I would expect them to be hiring more people globally.

At a minimum, they would hire to replace normal attrition. But the normal attrition rate, multiplied by a larger workforce, results in more new hires being hired.

If the cross selling efforts really work effectively for Deloitte, they would have to staff for both organic growth + the growth from cross selling. This might cause a 2 – 3 year structural increase in the number of new hire slots that Deloitte recruits for until the cross selling penetration hits a steady state of equilibrium.

Once again, determining which scenario will play out in real life ultimately is a test of Deloitte’s leadership skills and its ability to execute. It will be very interesting to watch.

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{ 2 comments… read them below or add one }

Michael Moshiri February 1, 2013 at 1:55 pm

Thanks Victor. I enjoyed reading this article… lays out the acquisition process and dynamics nicely for people who have never been through it (or experienced it at a Big 4 firm).

I would add this: I understand that many of the current Monitor clients were/are existing Deloitte clients. This may make the transition more seamless, especially if both firms have teams on the ground at a particular client simultaneously.

The scenario of common clients will probably require a little shuffling in the partner ranks, though, as most Big 4 firms have preset rules for partner roles (e.g., only one global advisory partner in charge of a particular client). But then again, that probably won’t impact the job-seekers much.

Great article. I’m going to share it with my network on LinkedIn.

Looking forward to reading more of your writing.

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John September 1, 2013 at 9:11 am

Great article Victor. But can you comment on what this means for Deloitte’s existing consulting function, particularly the Strategy & Operations? I know they operate at a level below executive, but I’m still not sure what they dynamics between S&O and Monitor staff is going to be like.

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